What does it mean for a stock to be undervalued?
It means something specific and checkable: the fair value a discounted-cash-flow model works out from a company's own filed accounts sits above what the market is paying. Below, that calculation is worked end to end on 3 companies — every assumption, every year, every step from cash flow to a per-share number.
These are worked examples of the method, chosen to show it on different kinds of business. They are not a selection of what to own, not ranked against each other, and not the output of a search for the cheapest shares — the same working is published for every company on this site. A gap between a model's value and the market price is a starting point for questions, not a verdict: it can mean the market is missing something, or that the model's assumptions are. Everything the calculation rests on is on this page so you can judge which. Educational material, not investment advice, and not a price target.
1Worked example
Mahindra and Mahindra
Automobile and Auto Components · Passenger Cars & Utility Vehicles
Model value₹7,670.78
Market price₹3,070
Gap+150%
WACC11.79%
Horizon7 yr
The model values one share at ₹7,670.78 against a market price of ₹3,070. That headline is the probability-weighted average of a bull, base and bear case; the base case alone comes to ₹7,329.58. Cash flows are projected for 7 years from a TTM base and discounted at 11.79%, with growth beyond that held at 6.8%.
01 Cost of capital (WACC)
| Component | Value | |
|---|---|---|
| 10-yr G-Sec yieldmarket | 6.78% | |
| Less: India sovereign default spreadmarket | (2.00%) | |
| Risk-free rate (default-free, used in CAPM) | a | 4.78% |
| Equity risk premiummarket | b | 6.48% |
| Betamarket | c | 1.26 |
| Size premium | s | 0.00% |
| Cost of equity (a + c×b + s) | D | 12.95% |
| Cost of debt (pre-tax)market | E | 11.84% |
| Equity weight (E/V) | F | 72.6% |
| Debt weight (D/V) | G | 27.4% |
| Tax ratehistorical | h | 26.2% |
| WACC = D×F + E×(1−h)×G | J | 11.79% |
The discount rate. Every future rupee below is discounted at this.
02 Key assumptions
| Assumption | Basis / formula | Value |
|---|---|---|
| Revenue growth (seed)historicalBlended seed: median YoY + 3y / 5y CAGR | Blended seed: median YoY + 3y / 5y CAGR | 18.6% |
| ↳ CAGR cross-check (3y / 5y / full)for reference | for reference | 17.9% / 21.7% / 9.9% |
| EBITDA marginhistoricalavg of last 3 fiscal years | avg of last 3 fiscal years | 18.6% |
| D&A (% of revenue)historicalΣ(D&A_i ÷ Revenue_i) ÷ n | Σ(D&A_i ÷ Revenue_i) ÷ n | 3.6% |
| Capex (% of revenue)historicalΣ(Capex_i ÷ Revenue_i) ÷ n | Σ(Capex_i ÷ Revenue_i) ÷ n | 5.9% |
| Net working capital — level (NWC ÷ revenue)historical(Receivables + Inventory − Payables) ÷ Revenue | (Receivables + Inventory − Payables) ÷ Revenue | -3.4% |
| Terminal growthmarketmin(nominal 10Y G-Sec anchor, WACC − 3.0%, near-term growth) | min(nominal 10Y G-Sec anchor, WACC − 3.0%, near-term growth) | 6.8% |
| Effective tax ratehistoricalAvg effective rate from the P&L (recent years), bounded 15–35% | Avg effective rate from the P&L (recent years), bounded 15–35% | 26.2% |
Each of these is derived from the company's own reported history or from observable market data — never from management guidance or a broker forecast.
03 Free cash flow to firm (FCFF) projection
| Line item (₹ crore) | FY1 | FY2 | FY3 | FY4 | FY5 | FY6 | FY7 |
|---|---|---|---|---|---|---|---|
| Revenue growth | 18.6% | 18.6% | 16.2% | 13.8% | 11.5% | 9.1% | 6.8% |
| Revenue | 2,50,598 | 2,97,100 | 3,45,233 | 3,93,033 | 4,38,194 | 4,78,224 | 5,10,648 |
| EBITDA | 46,513 | 55,445 | 64,778 | 74,144 | 83,108 | 91,184 | 97,883 |
| Less: Depreciation & amortisation | (9,078) | (10,841) | (12,687) | (14,547) | (16,334) | (17,952) | (19,303) |
| = EBIT | 37,435 | 44,605 | 52,090 | 59,597 | 66,774 | 73,232 | 78,580 |
| Less: Tax | (9,827) | (11,709) | (13,674) | (15,644) | (17,528) | (19,223) | (20,627) |
| = NOPAT (debt-free net income) | 27,609 | 32,896 | 38,416 | 43,953 | 49,246 | 54,009 | 57,953 |
| Add: Depreciation & amortisation | 9,078 | 10,841 | 12,687 | 14,547 | 16,334 | 17,952 | 19,303 |
| Less: Capital expenditure | (14,856) | (16,830) | (18,647) | (20,193) | (21,358) | (22,049) | (22,198) |
| Working capital movement | 1,339 | 4,063 | 4,921 | 5,704 | 6,322 | 6,686 | 6,713 |
| = Free cash flow to firm | 23,169 | 30,970 | 37,378 | 44,011 | 50,544 | 56,597 | 61,771 |
| Discount factor (mid-year) | 0.946 | 0.846 | 0.757 | 0.677 | 0.606 | 0.542 | 0.485 |
| Present value of FCFF | 21,914 | 26,202 | 28,289 | 29,796 | 30,609 | 30,661 | 29,934 |
FCFF = NOPAT + D&A − capex − ΔNWC · mid-year discounting convention
04 Terminal value & enterprise value
| Item | Value (₹ crore) |
|---|---|
| Sum of PV of FCFF (explicit period) | 1,97,403 |
| Terminal value (Gordon growth, g = 6.8%) | 12,36,725 |
| PV of terminal value | 5,99,313 |
| = Enterprise value | 7,96,717 |
Terminal value is 75% of enterprise value.
05 Equity value & value per share
| Item | Value |
|---|---|
| Enterprise value | 7,96,717 |
| Add: Net cash (cash − debt) | 22,657 |
| = Equity value | 8,19,373 |
| Shares outstanding (crore) | 111.79 |
| = Intrinsic value per share (base case) | ₹7,329.58 |
06 Scenario summary (₹ / share)
| Scenario | Per share | Upside / downside |
|---|---|---|
| Bull | ₹10,355.20 | +237.3% |
| Base | ₹7,329.58 | +138.7% |
| Bear | ₹3,740.73 | +21.8% |
07 Probability-weighted fair value
The headline figure is not the base case — it is the probability-weighted average of all three scenarios: Σ (scenario value × probability).
| Scenario | Per share (₹) | Probability | Contribution (₹) |
|---|---|---|---|
| Bull | ₹10,355.20 | 35.0% | ₹3,624.32 |
| Base | ₹7,329.58 | 45.0% | ₹3,298.31 |
| Bear | ₹3,740.73 | 20.0% | ₹748.15 |
| = Probability-weighted fair value | 100.0% | ₹7,670.78 |
vs current price ₹3,070 → +150%
Prior: base case is the single most likely outcome (25/50/25). Growth seed 18.6% (>15%) with improving margins → +10pp bull, −5pp bear.
2Worked example
TCS
Information Technology · Computers - Software & Consulting
Model value₹3,444.03
Market price₹2,189
Gap+57%
WACC10.23%
Horizon7 yr
The model values one share at ₹3,444.03 against a market price of ₹2,189. That headline is the probability-weighted average of a bull, base and bear case; the base case alone comes to ₹3,546.47. Cash flows are projected for 7 years from a TTM base and discounted at 10.23%, with growth beyond that held at 5.5%.
01 Cost of capital (WACC)
| Component | Value | |
|---|---|---|
| 10-yr G-Sec yieldmarket | 6.78% | |
| Less: India sovereign default spreadmarket | (2.00%) | |
| Risk-free rate (default-free, used in CAPM) | a | 4.78% |
| Equity risk premiummarket | b | 6.48% |
| Betamarket | c | 0.84 |
| Size premium | s | 0.00% |
| Cost of equity (a + c×b + s) | D | 10.23% |
| Cost of debt (pre-tax)market | E | 8.50% |
| Equity weight (E/V) | F | 100.0% |
| Debt weight (D/V) | G | 0.0% |
| Tax ratehistorical | h | 25.3% |
| WACC = D×F + E×(1−h)×G | J | 10.23% |
The discount rate. Every future rupee below is discounted at this.
02 Key assumptions
| Assumption | Basis / formula | Value |
|---|---|---|
| Revenue growth (seed)historicalBlended seed: median YoY + 3y / 5y CAGR | Blended seed: median YoY + 3y / 5y CAGR | 6.6% |
| ↳ CAGR cross-check (3y / 5y / full)for reference | for reference | 5.8% / 10.2% / 9.0% |
| EBITDA marginhistoricalavg of last 3 fiscal years | avg of last 3 fiscal years | 26.8% |
| D&A (% of revenue)historicalΣ(D&A_i ÷ Revenue_i) ÷ n | Σ(D&A_i ÷ Revenue_i) ÷ n | 2.1% |
| Capex (% of revenue)historicalΣ(Capex_i ÷ Revenue_i) ÷ n | Σ(Capex_i ÷ Revenue_i) ÷ n | 1.7% |
| Net working capital — level (NWC ÷ revenue)historical(Receivables + Inventory − Payables) ÷ Revenue | (Receivables + Inventory − Payables) ÷ Revenue | 19.8% |
| Terminal growthmarketmin(nominal 10Y G-Sec anchor, WACC − 3.0%, near-term growth) | min(nominal 10Y G-Sec anchor, WACC − 3.0%, near-term growth) | 5.5% |
| Effective tax ratehistoricalAvg effective rate from the P&L (recent years), bounded 15–35% | Avg effective rate from the P&L (recent years), bounded 15–35% | 25.3% |
Each of these is derived from the company's own reported history or from observable market data — never from management guidance or a broker forecast.
03 Free cash flow to firm (FCFF) projection
| Line item (₹ crore) | FY1 | FY2 | FY3 | FY4 | FY5 | FY6 | FY7 |
|---|---|---|---|---|---|---|---|
| Revenue growth | 6.6% | 6.6% | 6.4% | 6.2% | 6.0% | 5.8% | 5.5% |
| Revenue | 2,94,148 | 3,13,649 | 3,33,760 | 3,54,432 | 3,75,613 | 3,97,241 | 4,19,248 |
| EBITDA | 78,924 | 84,399 | 90,068 | 95,920 | 1,01,942 | 1,08,118 | 1,14,431 |
| Less: Depreciation & amortisation | (6,201) | (6,281) | (6,332) | (6,351) | (6,334) | (6,280) | (6,187) |
| = EBIT | 72,724 | 78,118 | 83,736 | 89,569 | 95,607 | 1,01,837 | 1,08,245 |
| Less: Tax | (18,428) | (19,795) | (21,219) | (22,697) | (24,227) | (25,806) | (27,429) |
| = NOPAT (debt-free net income) | 54,295 | 58,323 | 62,517 | 66,872 | 71,380 | 76,032 | 80,815 |
| Add: Depreciation & amortisation | 6,201 | 6,281 | 6,332 | 6,351 | 6,334 | 6,280 | 6,187 |
| Less: Capital expenditure | (4,961) | (5,289) | (5,629) | (5,977) | (6,334) | (6,699) | (7,070) |
| Working capital movement | (3,626) | (3,866) | (3,987) | (4,098) | (4,199) | (4,288) | (4,363) |
| = Free cash flow to firm | 51,910 | 55,448 | 59,234 | 63,148 | 67,181 | 71,326 | 75,569 |
| Discount factor (mid-year) | 0.953 | 0.864 | 0.784 | 0.711 | 0.645 | 0.585 | 0.531 |
| Present value of FCFF | 49,443 | 47,911 | 46,432 | 44,906 | 43,341 | 41,744 | 40,123 |
FCFF = NOPAT + D&A − capex − ΔNWC · mid-year discounting convention
04 Terminal value & enterprise value
| Item | Value (₹ crore) |
|---|---|
| Sum of PV of FCFF (explicit period) | 3,13,901 |
| Terminal value (Gordon growth, g = 5.5%) | 17,00,203 |
| PV of terminal value | 9,02,718 |
| = Enterprise value | 12,16,619 |
Terminal value is 74% of enterprise value.
05 Equity value & value per share
| Item | Value |
|---|---|
| Enterprise value | 12,16,619 |
| Add: Net cash (cash − debt) | 67,203 |
| = Equity value | 12,83,822 |
| Shares outstanding (crore) | 362.00 |
| = Intrinsic value per share (base case) | ₹3,546.47 |
06 Scenario summary (₹ / share)
| Scenario | Per share | Upside / downside |
|---|---|---|
| Bull | ₹4,088.92 | +86.8% |
| Base | ₹3,546.47 | +62.0% |
| Bear | ₹2,594.26 | +18.5% |
07 Probability-weighted fair value
The headline figure is not the base case — it is the probability-weighted average of all three scenarios: Σ (scenario value × probability).
| Scenario | Per share (₹) | Probability | Contribution (₹) |
|---|---|---|---|
| Bull | ₹4,088.92 | 25.0% | ₹1,022.23 |
| Base | ₹3,546.47 | 50.0% | ₹1,773.23 |
| Bear | ₹2,594.26 | 25.0% | ₹648.57 |
| = Probability-weighted fair value | 100.0% | ₹3,444.03 |
vs current price ₹2,189 → +57%
Prior: base case is the single most likely outcome (25/50/25). Weights renormalised to sum to 100%.
3Worked example
ZYDUS LIFESCIENCES
Healthcare · Pharmaceuticals
Model value₹2,466.17
Market price₹1,108
Gap+123%
WACC9.20%
Horizon7 yr
The model values one share at ₹2,466.17 against a market price of ₹1,108. That headline is the probability-weighted average of a bull, base and bear case; the base case alone comes to ₹2,599.41. Cash flows are projected for 7 years from a TTM base and discounted at 9.20%, with growth beyond that held at 6.2%.
01 Cost of capital (WACC)
| Component | Value | |
|---|---|---|
| 10-yr G-Sec yieldmarket | 6.78% | |
| Less: India sovereign default spreadmarket | (2.00%) | |
| Risk-free rate (default-free, used in CAPM) | a | 4.78% |
| Equity risk premiummarket | b | 6.48% |
| Betamarket | c | 0.74 |
| Size premium | s | 0.00% |
| Cost of equity (a + c×b + s) | D | 9.58% |
| Cost of debt (pre-tax)market | E | 7.17% |
| Equity weight (E/V) | F | 90.4% |
| Debt weight (D/V) | G | 9.6% |
| Tax ratehistorical | h | 21.7% |
| WACC = D×F + E×(1−h)×G | J | 9.20% |
The discount rate. Every future rupee below is discounted at this.
02 Key assumptions
| Assumption | Basis / formula | Value |
|---|---|---|
| Revenue growth (seed)historicalBlended seed: median YoY + 3y / 5y CAGR | Blended seed: median YoY + 3y / 5y CAGR | 14.8% |
| ↳ CAGR cross-check (3y / 5y / full)for reference | for reference | 16.3% / 12.4% / 10.8% |
| EBITDA marginhistoricalavg of last 3 fiscal years | avg of last 3 fiscal years | 29.7% |
| D&A (% of revenue)historicalΣ(D&A_i ÷ Revenue_i) ÷ n | Σ(D&A_i ÷ Revenue_i) ÷ n | 4.3% |
| Capex (% of revenue)historicalΣ(Capex_i ÷ Revenue_i) ÷ n | Σ(Capex_i ÷ Revenue_i) ÷ n | 7.6% |
| Net working capital — level (NWC ÷ revenue)historical(Receivables + Inventory − Payables) ÷ Revenue | (Receivables + Inventory − Payables) ÷ Revenue | 30.2% |
| Terminal growthmarketmin(nominal 10Y G-Sec anchor, WACC − 3.0%, near-term growth) | min(nominal 10Y G-Sec anchor, WACC − 3.0%, near-term growth) | 6.2% |
| Effective tax ratehistoricalAvg effective rate from the P&L (recent years), bounded 15–35% | Avg effective rate from the P&L (recent years), bounded 15–35% | 21.7% |
Each of these is derived from the company's own reported history or from observable market data — never from management guidance or a broker forecast.
03 Free cash flow to firm (FCFF) projection
| Line item (₹ crore) | FY1 | FY2 | FY3 | FY4 | FY5 | FY6 | FY7 |
|---|---|---|---|---|---|---|---|
| Revenue growth | 14.8% | 14.8% | 13.1% | 11.3% | 9.6% | 7.9% | 6.2% |
| Revenue | 32,817 | 37,668 | 42,588 | 47,421 | 51,989 | 56,104 | 59,583 |
| EBITDA | 9,750 | 11,286 | 12,867 | 14,447 | 15,969 | 17,374 | 18,600 |
| Less: Depreciation & amortisation | (1,413) | (1,634) | (1,861) | (2,087) | (2,304) | (2,504) | (2,678) |
| = EBIT | 8,337 | 9,652 | 11,006 | 12,360 | 13,665 | 14,870 | 15,922 |
| Less: Tax | (1,810) | (2,095) | (2,389) | (2,683) | (2,967) | (3,228) | (3,457) |
| = NOPAT (debt-free net income) | 6,527 | 7,556 | 8,617 | 9,676 | 10,698 | 11,641 | 12,466 |
| Add: Depreciation & amortisation | 1,413 | 1,634 | 1,861 | 2,087 | 2,304 | 2,504 | 2,678 |
| Less: Capital expenditure | (2,501) | (2,717) | (2,898) | (3,033) | (3,112) | (3,129) | (3,080) |
| Working capital movement | (1,276) | (1,180) | (1,126) | (1,027) | (882) | (693) | (468) |
| = Free cash flow to firm | 4,163 | 5,294 | 6,454 | 7,703 | 9,008 | 10,323 | 11,596 |
| Discount factor (mid-year) | 0.957 | 0.876 | 0.802 | 0.735 | 0.673 | 0.616 | 0.564 |
| Present value of FCFF | 3,984 | 4,639 | 5,179 | 5,661 | 6,062 | 6,362 | 6,545 |
FCFF = NOPAT + D&A − capex − ΔNWC · mid-year discounting convention
04 Terminal value & enterprise value
| Item | Value (₹ crore) |
|---|---|
| Sum of PV of FCFF (explicit period) | 38,431 |
| Terminal value (Gordon growth, g = 6.2%) | 3,94,810 |
| PV of terminal value | 2,22,813 |
| = Enterprise value | 2,61,245 |
Terminal value is 85% of enterprise value.
05 Equity value & value per share
| Item | Value |
|---|---|
| Enterprise value | 2,61,245 |
| Less: Net debt (debt − cash) | (1,823) |
| = Equity value | 2,59,421 |
| Shares outstanding (crore) | 99.80 |
| = Intrinsic value per share (base case) | ₹2,599.41 |
06 Scenario summary (₹ / share)
| Scenario | Per share | Upside / downside |
|---|---|---|
| Bull | ₹3,589.19 | +224.1% |
| Base | ₹2,599.41 | +134.7% |
| Bear | ₹1,076.66 | -2.8% |
07 Probability-weighted fair value
The headline figure is not the base case — it is the probability-weighted average of all three scenarios: Σ (scenario value × probability).
| Scenario | Per share (₹) | Probability | Contribution (₹) |
|---|---|---|---|
| Bull | ₹3,589.19 | 25.0% | ₹897.30 |
| Base | ₹2,599.41 | 50.0% | ₹1,299.70 |
| Bear | ₹1,076.66 | 25.0% | ₹269.17 |
| = Probability-weighted fair value | 100.0% | ₹2,466.17 |
vs current price ₹1,108 → +123%
Prior: base case is the single most likely outcome (25/50/25). Weights renormalised to sum to 100%.
Questions
What does it mean for a stock to be undervalued?
On this page it means one specific, measurable thing: the fair value our discounted-cash-flow model works out from the company's own filed accounts sits above the current market price. It is not a claim that the share is cheap or a suggestion to buy it — a gap can equally mean the market knows something the model's assumptions do not. Every assumption behind every number is shown here so the gap can be examined rather than taken on trust.
How is the fair value calculated?
By discounted cash flow. We forecast free cash flow to the firm from the company's own record, discount each year at its weighted average cost of capital, add a terminal value for the years beyond, subtract net debt and divide by the shares outstanding. That is done three times — a bull, a base and a bear case — and the headline figure is the probability-weighted average of the three. The whole build-up is printed below for each company.
Why is the headline figure different from the base case?
Because the headline is probability-weighted. The base case is the single most likely outcome, but it is not the only one, so the bull and bear cases are valued too and each is weighted by how likely it is. A point estimate that ignores the distribution around it overstates how precise a valuation can be. Both figures — the base case and the weighted headline — are shown.
Is this investment advice?
No. This is an educational illustration of a valuation method, not a recommendation. A fair value is an estimate that is only as good as its assumptions, and small changes to growth, margins or the discount rate move it a great deal. Do your own research and consider a SEBI-registered investment adviser before acting.